FTX exchange collapse, loss of $3.1 billion could have been avoided on one condition

FTX exchange, founded by Samuel Bankman-Fried (SBF), has consistently made headlines over the past month for its liquidity crisis and triggering a collapse in the crypto ecosystem. Trading firms, lenders and crypto hedge funds like Gemini, BlockFi and Genesis have been affected negatively by the FTX exchange fallout. US Senator Debbie Stabenow believes the FTX saga could have been prevented had the Digital Commodities Consumer Protection Act (DCCPA) been a law. 

Also read: Cryptocurrency assets to be defined as securities to pay for $12.7 billion conservation bill

FTX exchange bankruptcy proceedings reveal corporate failure

FTX exchange, headed by former CEO SBF, has been titled the “fastest big corporate failure in American history,” by the United States Trustee handling its bankruptcy proceedings. The now-defunct exchange could soon be subjected to an independent probe to look into its downfall. 

Andrew Vara, the US Trustee noted in a December 1 motion that over the course of eight days users suffered an unprecedented decline in the value of their holdings. From a high of $32 billion earlier in 2022, FTX’s creditors were subjected to a severe liquidity crisis, a proverbial run on the bank. Vara considers FTX exchange’s collapse a “free fall” bankruptcy case. 

Debbie Stabenow, US Senator and Chairwoman of the US Senate Committee on Agriculture, Nutrition, and Forestry released the following opening statement at a hearing titled “Why Congress Needs to Act: Lessons Learned from the FTX Collapse.” 

Chairwoman Stabenow said: 

In a matter of days, FTX and most of its affiliated companies collapsed into bankruptcy. At best, these events uncovered an alarming lack of internal controls and egregious governance failures. At worst, Sam Bankman-Fried and his inner circle lied to and stole from over one million customers—some of whom have lost their life savings.

The US Senator has identified governance and corporate failures in the FTX saga that burned a $3.1 billion hole in the pockets of its creditors. 

FTX was emboldened by lack of federal oversight

Senator Stabenow argues that SBF’s FTX exchange platform and his trading firm Alameda Research was emboldened by the lack of federal oversight. While federal regulators including the US Securities and Exchange Commission (SEC) already have authority to register and oversee crypto firms, they must actively choose to use that authority. 

The Chairwoman of the US Senate Committee on Agriculture argues that fraud prosecutions are a critical tool, but far too often, they are brought after customers’ money has been lost. This results in little to no recourse for the affected parties. 

The hotly debated Digital Commodities Consumer Protection Act sufficiently addresses the risks discussed above. When exchanges accept customer funds for trading, DCCPA would ensure that they are not allowed to gamble with those funds or invent products that have little to no intrinsic value and accept them as collateral for loans.

The DCCPA would replicate these protections for digital commodity markets and Senator Stabenow argues, in such a scenario, FTX’s conduct would have been illegal and could have been prevented.

FTX exchange collapse’s direct consequence is debates on regulation

FTX collapse and the brewing liquidity crisis, as well as the misappropriation of customer funds by former CEO Samuel Bankman-Fried have resulted in debates on transparency, solvency, and security. Regulations laid down by the European Union with Market in Crypto Assets (MiCA) will come into force next year, and those being discussed in the United States will likely also mature in 2023. 

Ignacio E. Carballo, Head of Crypto & Alternative Finance at Americas Market Intelligence believes that banks, neobanks, and regulated fintechs will probably see increased demand from consumers who are not sophisticated enough yet to move into non-custodial instruments. 

The shifting trends in crypto will undoubtedly mark the industry’s performance in Q4 2022 and early 2023.